WASHINGTON (May 25, 2012) – NTCA, OPASTCO, WTA and NECA filed an Application for Review and Petition for Stay of the quantile regression formulas and resulting caps on federal Universal Service Fund (USF) support adopted by the Wireline Competition Bureau on delegated authority from the Federal Communications Commission.

The caps were developed by Bureau staff in the wake of the Commission’s USF “Transformation” Order last fall to “create structural incentives for rate-of-return companies to operate more efficiently and make prudent expenditures.” As the Application for Review and Petition for Stay explain, however, numerous technical and legal flaws in the formulas adopted by the Bureau prevent the caps from achieving this purpose and will frustrate sustainable broadband deployment in rural areas contrary to law and good policy.

The new caps have the potential to arbitrarily limit any rural carrier’s USF support based on a complex system of quantile regression formulas. The formulas will generate “benchmarks” that are intended to identify if a rural carrier is potentially incurring excessive capital and operating costs. The benchmarks will then be used to cap affected carriers’ costs at lower levels. The Commission first published a proposed methodology for such caps last fall, and the Bureau took into account the comments of many stakeholders, including the rural associations, in attempting to improve the caps.

Despite these efforts, the formulas and the resulting caps suffer from a host of technical and legal flaws as described in the Application for Review and Petition for Stay. For example, the formulas continue to rely on data that are acknowledged to be wrong. They also impose random caps on support that are contrary to logic; for instance, the formulas appear to assume that per-customer costs will be higher in urban areas and that newer plant will cost more to maintain than older plant. The formulas are also imprecise and impenetrable, providing no clear business rules to inform any given carrier how its operations or investment could be allegedly “more efficient” or “more prudent.” This lack of transparency is exacerbated by unpredictability, because the benchmarks will change every year based on acts or omissions taken by carriers across the industry two years prior, which means that even if the business rules had been made clear, they would still change frequently and in unpredictable ways.

The rural associations, therefore, have urged the FCC to review and stay the use of the quantile regression formulas and the resulting caps because they are unsupported by evidence, contrary to law, harmful to rural consumers, and contrary to the objectives of promoting efficient, effective and sustainable rural broadband investment. The rural associations instead urge the Commission in today’s filings to adopt more transparent business rules, such as those proposed more than a year ago by the rural associations to constrain future investment based on the need to replace and upgrade aging network plant.

“The regression analysis formulas impose caps that are random from the start and will shift over time in ways that no carrier can hope to predict,” said Shirley Bloomfield, NTCA’s chief executive officer. “A support system that requires carriers, lenders, and investors to guess where caps will be imposed next—and does not signal clearly why those caps might apply in any given case—will undermine access to capital for rural broadband and violate the basic requirements that universal service be predictable and sufficient.”

“It is critical that the FCC immediately suspend implementation of the Wireline Bureau’s regression analysis-based formulas for capping RLECs’ reimbursable capital and operating costs,” said Stuart Polikoff, OPASTCO’s vice president of regulatory policy and business development. “The Bureau’s formulas are arbitrary, unpredictable, utilize faulty data and ultimately fail to accomplish what they were intended to do: encourage carrier efficiency and increase broadband deployment. Implementation of the Bureau’s regression-based caps would harm many rural consumers, who would face declines in service quality and higher rates for service. The Commission can and should protect rural consumers by setting aside the Bureau’s Order.”

“The unpredictable nature of the formulas and caps will depress broadband build-out in the rural areas our members serve, which will ultimately harm the consumer,” said Kelly Worthington, WTA’s executive vice president. “The results will be completely contrary to President Obama’s goal of expanding broadband access in all rural areas.”